Trump’s reckless budget bill ignores a ticking population time-bomb. Here’s how investors should prepare for it
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There is plenty that is big and nothing that is beautiful about the budget bill that made its way through Congress, with pressure bearing down from the White House.
Of course, the major plank is extending the 2017 income tax cuts, which were supposed to sunset at the end of this year — because without that pledge, the CBO budget scoring would never have allowed for its expiration. This is not 2017 when the fiscal deficit was running near US$600 billion. This is 2025, and the shortfall is around US$2 trillion. So, with all the bells and whistles (tax relief on tips and overtime? Really?), tinkering when it comes to spending restraint, making what was supposed to be a ten-year period of tax relief permanent (never mind that we can’t afford it), this will ensure that large-scale deficits and debts will be with us as far as the eye can see.
It is regrettable that there is nothing in this not-so-beautiful bill that arrests the unprecedented buildup of federal debt, but only compounds the problem. Nobody seems to care.
Of course, there is no sign, despite all the horror stories out there about a foreign buyers’ strike, that the Treasury has experienced much difficulty in having the supply bulges at bond auctions met with investor demand.
While fiscal policy actually only has a loose 20% correlation with the direction of bond yields, this is not insignificant and explains why U.S. Treasury yields are among the highest in the developed world.
President Donald Trump craves lower interest rates, but his own policies are frustrating that objective, even with an economy that has softened, and inflation that is in the process of receding again, even with the tariff backdrop.
My big concern stems from the old refrain from American economist Herbert Stein to the effect that anything that can’t last forever by definition will not. There is a risk that at some point something will break — and perhaps the steep correction in the U.S. dollar is an early sign that some investors are losing faith in fiscal policy. That the dollar selloff can take hold as it has with the Fed keeping rates relatively elevated is something that deserves close attention.
There are three things we need to consider beyond that.
First, the current deficit and debt bulge, with no political resolve to arrest it, will severely constrain fiscal policymakers in the future, especially when it comes time to fight recessions.
Second, basic economic theory dictates that what ends up happening is not accelerating economic growth from all this buildup of government debt, but rather a “crowding out” of business sector credit availability. This is why, outside of AI data centers, capex right now is in a fundamental downturn. There is only so much funding available in the capital market pie, and the public sector plans on siphoning off an increasing share of this financing at the expense of corporate borrowing and spending.
Third, and perhaps the most important point, the deficit and debt situation is becoming increasingly structural in nature as mounting interest expenses ensnare fiscal finances now and well into the future.
When I say structural, I mean the power of compound interest in this ever-growing mountain of debt.
Check out these numbers:
• Interest expense: US$945 billion (that’s $2.6 billion DAILY)
• Defense spending: US$910 billion
• Medicare: US$970 billion
• Social Security: US$1.5 trillion
Interest costs now exceed defense spending. Think about that. The U.S. is paying more to service the massive accumulation of fiscal red ink than to defend the nation. Debt-service expenses are now closing in on Medicare. By 2034, interest expense is expected to hit US$1.7 trillion, which is more than what we currently spend on Social Security. We have reached a stage where half the deficit is due to interest costs, and with the way politicians in Washington are dealing with this situation, all of the deficit within the next decade will come from servicing the debt.
Want to know what that does to the economy, financial market stability, and the currency? Go and check out what happened to Canada in the late 1980s and early 1990s. An important history lesson for the uninformed and uninitiated, of which there is no shortage in Washington today.
My disappointment is profound.
The cries out of the White House that the economy will fall off a cliff because of what is labelled an “historic tax hike” are absurd when you consider that all that would happen was what was supposed to happen back in 2017, which was a sunsetting of what was intended to be a ten-year tax cut, not a permanent tax cut.
The only thing that is permanent in Washington, no matter who is President, is spending. It is incredible that we are seeing deficits around US$2 trillion even though government revenues, courtesy of the expanding economy, have surged 43% from where they were pre-COVID-19. The shame comes from the fact that even with the COVID-19 crisis long gone, the level of government expenditure is more than 50% higher today than it was before the pandemic hit.
So, while the budget bill certainly is BIG when it comes to spending, tinkering at the edges, it is not at all beautiful when it comes to exacerbating what is clearly an unsustainable fiscal path.
For all the concern about allowing the 2017 tax relief act to expire, I ask — why not just take tax rates to zero and see what happens when the deficit tops US$7 trillion?
?
There is plenty that is big and nothing that is beautiful about the budget bill that made its way through Congress, with pressure bearing down from the White House.
Of course, the major plank is extending the 2017 income tax cuts, which were supposed to sunset at the end of this year — because without that pledge, the CBO budget scoring would never have allowed for its expiration. This is not 2017 when the fiscal deficit was running near US$600 billion. This is 2025, and the shortfall is around US$2 trillion. So, with all the bells and whistles (tax relief on tips and overtime? Really?), tinkering when it comes to spending restraint, making what was supposed to be a ten-year period of tax relief permanent (never mind that we can’t afford it), this will ensure that large-scale deficits and debts will be with us as far as the eye can see.
It is regrettable that there is nothing in this not-so-beautiful bill that arrests the unprecedented buildup of federal debt, but only compounds the problem. Nobody seems to care.
Of course, there is no sign, despite all the horror stories out there about a foreign buyers’ strike, that the Treasury has experienced much difficulty in having the supply bulges at bond auctions met with investor demand.
While fiscal policy actually only has a loose 20% correlation with the direction of bond yields, this is not insignificant and explains why U.S. Treasury yields are among the highest in the developed world.
President Donald Trump craves lower interest rates, but his own policies are frustrating that objective, even with an economy that has softened, and inflation that is in the process of receding again, even with the tariff backdrop.
My big concern stems from the old refrain from American economist Herbert Stein to the effect that anything that can’t last forever by definition will not. There is a risk that at some point something will break — and perhaps the steep correction in the U.S. dollar is an early sign that some investors are losing faith in fiscal policy. That the dollar selloff can take hold as it has with the Fed keeping rates relatively elevated is something that deserves close attention.
There are three things we need to consider beyond that.
First, the current deficit and debt bulge, with no political resolve to arrest it, will severely constrain fiscal policymakers in the future, especially when it comes time to fight recessions.
Second, basic economic theory dictates that what ends up happening is not accelerating economic growth from all this buildup of government debt, but rather a “crowding out” of business sector credit availability. This is why, outside of AI data centers, capex right now is in a fundamental downturn. There is only so much funding available in the capital market pie, and the public sector plans on siphoning off an increasing share of this financing at the expense of corporate borrowing and spending.
Third, and perhaps the most important point, the deficit and debt situation is becoming increasingly structural in nature as mounting interest expenses ensnare fiscal finances now and well into the future.
When I say structural, I mean the power of compound interest in this ever-growing mountain of debt.
Check out these numbers:
• Interest expense: US$945 billion (that’s $2.6 billion DAILY)
• Defense spending: US$910 billion
• Medicare: US$970 billion
• Social Security: US$1.5 trillion
Interest costs now exceed defense spending. Think about that. The U.S. is paying more to service the massive accumulation of fiscal red ink than to defend the nation. Debt-service expenses are now closing in on Medicare. By 2034, interest expense is expected to hit US$1.7 trillion, which is more than what we currently spend on Social Security. We have reached a stage where half the deficit is due to interest costs, and with the way politicians in Washington are dealing with this situation, all of the deficit within the next decade will come from servicing the debt.
Want to know what that does to the economy, financial market stability, and the currency? Go and check out what happened to Canada in the late 1980s and early 1990s. An important history lesson for the uninformed and uninitiated, of which there is no shortage in Washington today.
My disappointment is profound.
The cries out of the White House that the economy will fall off a cliff because of what is labelled an “historic tax hike” are absurd when you consider that all that would happen was what was supposed to happen back in 2017, which was a sunsetting of what was intended to be a ten-year tax cut, not a permanent tax cut.
The only thing that is permanent in Washington, no matter who is President, is spending. It is incredible that we are seeing deficits around US$2 trillion even though government revenues, courtesy of the expanding economy, have surged 43% from where they were pre-COVID-19. The shame comes from the fact that even with the COVID-19 crisis long gone, the level of government expenditure is more than 50% higher today than it was before the pandemic hit.
So, while the budget bill certainly is BIG when it comes to spending, tinkering at the edges, it is not at all beautiful when it comes to exacerbating what is clearly an unsustainable fiscal path.
For all the concern about allowing the 2017 tax relief act to expire, I ask — why not just take tax rates to zero and see what happens when the deficit tops US$7 trillion?
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